Thursday, 12 June 2014

How To Overcome Emotion As An Investor

By Jesse Wayne

As human beings, we have emotions that cannot be turned off. Whether you want them to exist or not, there’s no way to prevent emotions from surfacing. Emotions are for the most part, extremely useful tools that have helped humans survive for millions of years. Take fear for example – when something terrifies you or threatens your life, you want your body to enter a state you never thought possible. Super strength and lightening quick reflexes are welcomed responses at this point.

Emotions are WORTHLESS as an investor.

Before typing that statement I thought long and hard about its validity. In school, you’re taught that phrases like always and never are giveaways to a statement being false. Not often is something always or never true. In this case, it is.

Fear, excitement, joy, regret, etc. – all have no use to an investor. Why would these emotions matter? There are thousands or perhaps millions of people holding the same position as you. Some have profited, some have lost money and others have broken even. That means that some are happy, others are angry or sad and the rest are indifferent. Several different emotions and the stock can still move in one only direction.

Not Just People Invest Today
Introduce machines into the equation and emotions become even more irrelevant. Whether you like it or not, machines have become a significant force in the market. From advanced algorithms set up to scrape tenths of a penny to robust systems that can buy and sell millions of shares in a matter of nanoseconds, they all share one thing in common – the absence of emotion.

Cool, Calm and Collected
As an investor, you must be cool, calm and collected. The ability make rational decisions about what to buy and sell can become your most valuable tool. Emotion actually makes you weak and exposes you to judgements that would normally not make sense. If you absolutely know that a stock is oversold and will move upward soon, a drop in price lower than your purchase price can cause a gut reaction to sell.

So how do you avoid trading based on emotions? How do you prevent yourself from panicking when you’re fearful that you might lose a good chunk of your net worth? You have to learn to recognize your emotions and address them accordingly. That’s exactly what this infographic will help you do.

Think, Don’t Feel, Before Trading
By identifying your emotions and how they may impact your actions, you can apply rational thinking to your situation. For example, if the stock you own comes out with negative earnings and declines 4% as a result, stop and think before you hit that sell button. You obviously thought the stock was a good investment before declining in price, so evaluate the recent earnings announcement and determine whether or not OTHER investors are overreacting. Chances are, if you thought about selling immediately in an attempt to minimize your losses, others have done that exact same thing. I can’t count the number of times I've seen a stock take a huge haircut only to rally and regain much of its losses by the end of the day.

That’s not to say that you should never sell a stock if it’s up or down in a big way, just don’t make that decision based on joy or fear.

READERS: When did you overreact based on emotions only to regret your decision afterwards?

emotional investing infographic

Bob Parsons® 16 Rules for Success in Business and Life in General

1.  Get and stay out of your comfort zone.
I believe that not much happens of any significance when we're in our comfort zone. I hear people say, "But I'm concerned about security." My response to that is simple: "Security is for cadavers."

2. Never give up.
Almost nothing works the first time it's attempted. Just because what you're doing does not seem to be working, doesn't mean it won't work. It just means that it might not work the way you're doing it. If it was easy, everyone would be doing it, and you wouldn't have an opportunity.

3. When you're ready to quit, you're closer than you think.
There's an old Chinese saying that I just love, and I believe it is so true. It goes like this: "The temptation to quit will be greatest just before you are about to succeed."

4. With regard to whatever worries you, not only accept the worst thing that could happen, but make it a point to quantify what the worst thing could be.Very seldom will the worst consequence be anywhere near as bad as a cloud of "undefined consequences." My father would tell me early on, when I was struggling and losing my shirt trying to get Parsons Technology going, "Well, Robert, if it doesn't work, they can't eat you."

5. Focus on what you want to have happen.
Remember that old saying, "As you think, so shall you be."

6. Take things a day at a time.
No matter how difficult your situation is, you can get through it if you don't look too far into the future, and focus on the present moment. You can get through anything one day at a time.

7. Always be moving forward.
Never stop investing. Never stop improving. Never stop doing something new. The moment you stop improving your organization, it starts to die. Make it your goal to be better each and every day, in some small way. Remember the Japanese concept of Kaizen. Small daily improvements eventually result in huge advantages.

8. Be quick to decide.
Remember what General George S. Patton said: "A good plan violently executed today is far and away better than a perfect plan tomorrow."

9. Measure everything of significance.I swear this is true. Anything that is measured and watched, improves.

10. Anything that is not managed will deteriorate.
If you want to uncover problems you don't know about, take a few moments and look closely at the areas you haven't examined for a while. I guarantee you problems will be there.

11. Pay attention to your competitors, but pay more attention to what you're doing.
When you look at your competitors, remember that everything looks perfect at a distance. Even the planet Earth, if you get far enough into space, looks like a peaceful place.

12. Never let anybody push you around.
In our society, with our laws and even playing field, you have just as much right to what you're doing as anyone else, provided that what you're doing is legal.

13. Never expect life to be fair.
Life isn't fair. You make your own breaks. You'll be doing good if the only meaning fair has to you, is something that you pay when you get on a bus (i.e., fare).

14. Solve your own problems.
You'll find that by coming up with your own solutions, you'll develop a competitive edge. Masura Ibuka, the co-founder of SONY, said it best: "You never succeed in technology, business, or anything by following the others." There's also an old saying that I remind myself of frequently. It goes like this: "A wise man keeps his own counsel."

15. Don't take yourself too seriously.
Lighten up. Often, at least half of what we accomplish is due to luck. None of us are in control as much as we like to think we are.

16. There's always a reason to smile.
Find it. After all, you're really lucky just to be alive. Life is short. More and more, I agree with my little brother. He always reminds me: "We're not here for a long time, we're here for a good time!"

"Copyright © 2004 Bob Parsons - All rights reserved. Reproduced with permission."

Quote for the day

“Liquid markets are, by definition, traded by a large crowd of traders. Although it is nearly impossible to determine what a single trader will do, it is possible to determine the statistical probability of what a large crowd of traders will do. Mass crowd psychology comes into play, the result of mass human emotion as it swings from fear to hope, and back again.” - Rich Swannell